The conduct of financial services companies is likely to be regulated in future by tough new laws encompassing many existing laws but going further to ensure that companies treat you fairly.
The tougher regulation, which is taking shape through various initiatives, aims to stamp out many bad practices and past failures in the financial services industry.
This is apparent from National Treasury’s draft discussion document on market conduct policy. The document was released this week for comment, together with the second draft Financial Sector Regulation Bill.
The Financial Sector Regulation (FSR) Bill will establish new regulators to oversee the financial soundness of financial institutions, through the Prudential Authority, and their market conduct, through the Financial Sector Conduct Authority (FSCA). These two institutions will take over some of the roles of the Reserve Bank and the role of the Financial Services Board (FSB). This separation of regulatory roles is dubbed the “twin peaks” system.
In the document, Treasury outlines plans to introduce a Conduct of Financial Institutions (CoFI) Act that will regulate the conduct of financial institutions in the way they are currently regulated through various laws, such as the insurance Acts, the Pension Funds Act, the Collective Investment Schemes Control Act (Cisca) and the Financial Advisory and Intermediary Services Act.
The document acknowledges that current consumer protection laws do not go far enough. It states that modern conduct regulators focus on what the financial services sector delivers to you and increasingly makes judgments on what is fair, rather than just what complies with the law. This goes beyond responding to your complaints and identifying poor practices of which you may not even be aware.
The document says the regulation should be “intensive and intrusive” and “pre-emptive and pro-active”.
The Conduct of Financial Institutions Act will fully implement treating customers fairly (TCF) principles the FSB has adopted in regulating financial institutions within the existing laws.
Many of the proposals for future market conduct cover those already published in retirement reform proposals, the Retail Distribution Review proposals on how you pay for financial products, and the report on the consumer credit insurance market.
However, there are some proposals. For example, the discussion document proposes tackling unregulated investment products that have resulted in millions of rands of losses for consumers. It notes the need to address “the risk of fraudulent misuse of [investors’] assets (as was unfortunately seen in the cases of Fidentia, Tannenbaum and Sharemax)”.
The discussion document reveals that Treasury and the FSB are working together to introduce a prudential regulation for investments, incorporating elements of the Collective Investment Schemes Control Act (Cisca).
The document notes that Cisca protects investors by ring-fencing investors’ assets in a trust under strict oversight by a trustee.
It also notes that, currently, some investments, such as private equity funds and real investment trusts, are under-regulated, while others, such as property syndications and factoring investments (where outstanding debts are sold at a discount to investors), lie outside the financial regulatory net.
Treasury says proposals for the prudential regulation of investments will be released next year or in 2016.
The complexity and layering of charges that occur when investments are accessed through products or platforms such as retirement annuities and linked- investment service providers is also listed as conduct that needs to be addressed.
The document highlights concerns about life assurance products. It says the Treasury and the FSB will work on addressing:
* Unfair and inappropriate terms and conditions in policies, and policies that have low claims-to-premium ratios. The regulators want to introduce standardised product features so that you can compare products more easily.
* Underwriting at claims stage.
* Releasing information to ensure you can distinguish “good” insurers that treat customers fairly from “bad” insurers.
The document notes that the Treasury and the FSB are working on phasing in over 2015 and 2016 requirements for financial services providers to give you key information documents with standardised terminology.
Some of the bad practices in the short-term insurance industry that the document highlights include:
* Complex and confusing terminology in policies;
* Denying insurance claims on the basis that the policyholder had not reported a previous minor incident; and
* Multiple and layered excesses on polices.
Another proposal in the document is to make product providers responsible for ensuring your financial adviser has sufficient knowledge about providers’ products. Product knowledge will be linked to continuous professional development for financial advisers, the document proposes.
The FSR Bill provides for the new FSCA to set conduct standards for financial services providers, including objectives for the fair treatment of you as a consumer of financial products. The document says this will take over from the current notices and rules issued by the FSB.
The FSCA will have greater powers than those currently available to the FSB to issue directives to financial institutions, appoint statutory managers, suspend or withdraw licences, registrations or authorisations, and declare practices undesirable or irregular.
The FSCA will also have the power to debar anyone who has contravened a financial sector law, directive or enforceable undertaking, from providing financial products or services, or acting as a key person or representative of a financial institution.
The FSR Bill proposes scrapping the existing Financial Services Ombuds Schemes Council and creating a strong, independent council. Treasury says the establishment of the new council will address current weaknesses, including lack of co-ordination and consistency among the ombuds and jurisdictional boundaries between the ombuds.
The document also says ombuds will play a greater role in identifying trends, such as unfair products, and reporting these to the FSCA.
Ismail Momoniat, the deputy director general for tax and financial sector policy at the Treasury, says Treasury has not yet begun work on the CoFI Act. It will come in the second phase of implementing the twin peaks legislation, after the two new regulators have been established.
WHERE WILL THE BANKS FALL?
Banks will fall under the market conduct regulator, and they will be subject to “intense and intrusive” supervision aimed at preventing poor conduct and ensuring they deliver fair outcomes. This is according to a hard-hitting discussion document released by National Treasury this week.
“Treating customers fairly in the financial sector: a market conduct policy framework for South Africa” states that the government’s decision to establish a market conduct regulator was strongly influenced by the work of the Jali enquiry.
The Jali enquiry, chaired by advocate Thabani Jali, was appointed in 2008 by the Competition Commission to look into bank charges, the market power of the four biggest banks, access to the payment system, and whether banks had contravened the Competition Act.
The enquiry “outlined the poor treatment of customers in the retail-banking sector”, and, although “considerable progress” has been made since then, abuses persist, Treasury’s discussion document says.
There are no laws governing how banks conduct their business activities, barring “limited coverage” by the Consumer Protection Act and when advice is rendered under the Financial Advisory and Intermediary Services Act, leaving bank customers exposed to the risk of unfair treatment.
The document notes the need to implement adequate standards for the debit order system, to curb debit order abuse by fraudulent users.
It says that minimum standards have been identified, including:
* The implementation of a list of debit-order users that misuse or abuse debit order transactions or process fraudulent transactions against consumers’ accounts. If listed, the debit-order user will be denied access to the national payment system;
* A review of telephone debit-order mandate requirements “as the majority of fraudulent debit orders processed originate from call centres”; and
* The implementation of fit and proper requirements for debit-order users.
The document also provides an “action plan” to promote better outcomes for bank depositors. It says the immediate focus will be on:
* Exploring ways to better disclose account fees and charges to prospective and existing customers and to promote product comparability and competition, not only through information provided at the point of sale, but also through product simplification and/or system changes, such as pre-transaction fee disclosure on ATMs;
* Exploring ways to improve contestability, for example by disallowing transaction “penalty” fees when using another bank’s ATM infrastructure;
* Developing conduct standards in order to apply the treating customers fairly principles to banks, with a focus on debit order practices; and
* Monitoring retail banks’ delivery against financial literacy, capability and inclusion targets as set out in the Financial Sector Code.
The financial sector asserts its power over customers and often over governments, the report says. This necessitates a higher standard of regulatory intervention compared with other sectors.
“Generic consumer protection law is not sufficient to protect financial customers. Generally, more complicated products and more vulnerable consumers warrant more regulatory protection,” it says. Protecting customers goes beyond a regulator responding to customer complaints.
To mitigate risk, the market conduct regulator will focus on customer outcomes rather than tick-box compliance, and seek to ascertain “fairness”. The regulator will scrutinise the relationship between a financial institution and its customers (including the end customer), and relationships between the institution and other sector participants that might affect customers. – Angelique Ardé
NCR WILL REMAIN INDEPENDENT
The National Credit Regulator (NCR) will maintain its regulatory independence and exist alongside the new market conduct regulator for the financial services sector, rather than being incorporated into it, a discussion document by National Treasury revealed this week.
The document lists the following “persistent” market conduct challenges relating to the extension of credit by the banks and players that are not in the banking sector:
* Reckless lending practices that lead to over-indebtedness, especially pay-day lending;
* The sale of unsuitable, incorrectly targeted credit products;
* Poor sales incentives that drive unfair lending practices;
* A multiplicity of fees and commissions that are often high and opaque, compounded by inadequate or poor disclosure to customers;
* Abuse of the payments system to collect debt, including abuse of suretyships;
* Abuse of emolument attachment orders (EAOs);
* Abusive debit order practices; and
* Poor conduct practices in extending consumer credit insurance linked to loans, aggravated by the ability to exploit captive (often vulnerable) customers through mandatory cover, bundled products, interconnected business models and conflicted distribution models.
Over-indebtedness in the credit sector is one example of the existence of “abusive practices where there is already regulatory coverage”, the document says.
Many financial sector participants appear insufficiently focused on customer needs and interests, the document says. This can be seen, for example, in “the prevalence of reckless lending and unconscionable debt collection practices”.
“Confronting unscrupulous lenders and relieving over-indebted households” is listed as a top priority for regulators.
The document provides a “project plan” to alleviate over-indebtedness and promote better outcomes for borrowers, calling on employers, including the State, to investigate the EAOs against their employees and deal with those that are illegitimately or incorrectly issued, and to make financial wellness programmes available to their employees.
It also calls for “willing lenders” to provide appropriate relief to distressed borrowers “including through free voluntary debt relief mediation, restructuring of loans and reducing the instalment burden, without additional cost to the borrowers”.
To prevent consumers from becoming over-indebted, lenders will have to adhere to affordability criteria and standards for the future use of EAOs, especially for small loans. These have yet to be determined.
The document says that proposals to alleviate over-indebtedness to be effected over the long term include:
* Extending and strengthening debt collection law to apply to legal firms and ensuring that debt collectors are fit and proper;
* Setting standards for access to the payment system, including for debit orders. Persistent reckless lenders should be denied access to the system;
* Ensuring the provision of credit is not only affordable but suited to customer needs;
* Reviewing the level and composition of pricing caps under the NCA to ensure that cap levels are appropriate, especially for pay-day loans; and
* Investigating simpler and lower-cost insolvency arrangements for lower- and middle-income individual persons. – Angelique Ardé